Tax cuts put Democrats on defensive

WASHINGTON (CBS.MW) - Paralyzed by the upcoming election, Democrats seem powerless or unwilling to stop Republican efforts to hand the wealthiest Americans hundreds of billions of dollars in tax breaks, wrapped in the guise of help for the middle class.

“It’s one of the most brilliant political public relations campaigns I’ve seen in decades.”
Robert Greenstein,Center for Budget and Policy Priorities

The Senate voted Tuesday to limit debate on repeal of the estate tax while the House prepares to vote Wednesday on a bill that eliminates the so-called marriage penalty in the income tax.

With some Democratic support, the two bills could be on President Clinton’s desk by the end of the month, just about the time the Republicans’ national convention is underway in Philadelphia.

Perfect timing, if you want to tag the Democrats as tax-and-spenders and embarrass the president into embracing your issues. Clinton promised to veto both bills, but has signaled a willingness to go along with some “targeted” tax cuts.

A lot riding

Don’t count out the possibility that Clinton will once again sign on to the Republican plan and then declare victory.

The fortunes of Vice President Al Gore and the hopes of Democrats to take back control of the House could rest on what happens with the tax cuts.

If enacted, the two tax cuts are expected to cost the Treasury about $280 billion in lost revenues in the next 10 years, and far more when all their provisions are fully phased in.

Ultimately, the two bills would cut taxes by about $75 billion a year, with about $65 billion going to the 9 million households earning more than $100,000 a year while 24 million households at the bottom would share less than $4 billion.

For the first time since the early days of the Gingrich regime five years ago, the Republicans have seized the political advantage over Clinton. The Republicans, not Clinton, are able to frame the debate and paint the other side as out-of-touch, irresponsible and dogmatic.

“It’s one of the most brilliant political public relations campaigns I’ve seen in decades,” said Robert Greenstein, director of the somewhat liberal Center for Budget and Policy Priorities, a Washington think tank.

Masterful manipulation

Somehow, the Republicans convinced many people (and a majority in the House) that the estate tax that most Americans will never have to even think about, much less pay, is an unfair and immoral outrage deserving of Congressional relief.

Americans still favor a more-equal distribution of wealth, but are less likely to back government action to achieve equality.

Repealing the estate tax has long been a goal of the wealthy who pay it and of their lobbyists in Washington, like the Chamber of Commerce and the newly potent National Federation of Independent Businesses. But repeal was never politically achievable until now.

What’s different? Public attitudes and the burgeoning federal surplus. While Americans still favor a more-equal distribution of wealth and income, they are less likely to favor government action to achieve equality. And greater numbers feel that they could become rich through their own hard work, luck or simply by clicking a mouse at the right time.

The growing federal surplus means the Democrats can no longer credibly call GOP tax cuts “risky.” There seems to be plenty of money for paying down the debt, increasing spending on defense and domestic programs, shoring up Social Security and Medicare, and giving back hundreds of billions to taxpayers.

So what if the budget projections are hogwash? It’s too late for the Democrats to play that card.

A specious argument

Treasury Department statistics -- provided, of course, by the Democratic administration -- show that fewer than 1,500 small businesses and farms are affected by the estate tax each year. But that hasn’t stopped the proponents of repeal from using a kind of Norman Rockwell strategy, portraying the estate tax as the final insult to hard-working American farmers and entrepreneurs.

The hard truth is that many small businesses and farms are sold off at the death of the owner, not to satisfy Uncle Sam’s morbid greed, but because the heirs don’t want to be bothered with running the business or because dividing the estate two or more ways is easier that way.

Clinton signaled Monday that he’s anxious to avoid a catfight over estate taxes. With trillions in surpluses available, he’s trying to find a way to totally exempt family farmers and entrepreneurs from the tax without giving a huge windfall to the truly wealthy whose riches consist mostly of easily redeemable stocks and bonds.

Willing to deal

The Chamber of Commerce’s Tom Donahue also hinted he’s willing to compromise with Clinton on estate-tax reform rather than outright repeal. The end game depends on whether the Republicans think a hard-to-explain veto will play better for them on Election Day than a little tax relief for a few hundred families.

Most of the tax relief in the Republican bill isn’t targeted at the marriage penalty per se, but at couples with two large incomes.

The Republicans have regained that Reaganesque touch of transforming the debate with a slogan. Rename the estate tax “the death tax” and watch support for its repeal mount. In the same way, they’ve crafted the debate on the marriage penalty, playing on our sense of what’s right: People shouldn’t be penalized for doing the right thing by marrying.

Most of the tax relief in the Republican bill isn’t targeted at the marriage penalty per se, but at couples with two large incomes.

Under current law, couples with two large incomes pay more tax than they would if they were single. But many people at the bottom of the income scale or those in traditional breadwinner-homemaker families actually receive a “marriage benefit” from the tax law.

Once the marriage penalty is repealed, we can expect singles to start agitating to remove their penalty. Unfortunately for them, single people are the last unprotected class in America.

Rex
Nutting

Rex Nutting is a columnist and MarketWatch's international commentary editor, based in Washington. Follow him on Twitter @RexNutting.

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